Fannie Mae and Freddie Mac takeover and conservatorship - Impacts and Outcomes
The treasury along with the Federal Reserve and Federal Housing regulator (FHFA) announced a take over via conservatorship of the government sponsored entities of Freddie Mac and Fannie Mae. Current actions will definitely provide a cushion, but long term structural reform is needed to ensure this does not happen again and tax payer bailout losses are minimized. They (the government) have protected debtors but common and preferred shareholders are going to suffer massive losses. Also, what is the future of Freddie Mac and Fannie Mae employees? Both companies have already undertaken large layoffs, but will be pressured to streamline further, with the possibility of a merger down the road. Paulson (Treasury secretary) and Lockhart (FHFA director) announced it will be business as usual on Monday for the two public companies, but I think it will be far from that as the legal ramifications from shareholders and other stakeholders commence. The one really good and decisive action that the government took was to replace the companies senior leadership and announce the appointment of 2 new and external CEO’s effective - Herb Allison for Fannie Mae and David Moffett for Freddie Mac - immediately with the past CEO’s will stay for a brief transition period. Here are some highlights of the takeover arrangement from Bloomberg.
"We have determined that it is necessary to take action,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in a statement today. "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.''
Lockhart said his agency has placed Fannie Mae and Freddie Mac into conservatorship. This was because the companies "cannot continue to operate safely and soundly and fulfill their critical public mission without significant action to address our concerns,'' he said in a statement. "The government wasn't going to allow them to muddle through this mess,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in
Morgan Stanley, hired by the Treasury to probe the companies' finances, concluded the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings were confidential. Paulson hired Morgan Stanley a month ago to advise on Fannie and Freddie. Paulson also consulted with Bank of America Corp. Chief Executive Officer Kenneth Lewis on his plan. Bernanke participated in the meetings/decision because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital.
Paulson told Fannie Chief Executive Officer Daniel Mudd, 50, and Freddie CEO Richard Syron, 64, about his plan two days ago. The top managers of the two government-sponsored enterprises, which have operated as private shareholder-owned corporations for almost 40 years, will be forced out, two people briefed on the discussions said.
Herb Allison, formerly of TIAA-Cref, will take over as Fannie's new CEO, while David Moffett, formerly of U.S. Bancorp, will head Freddie, Lockhart said in his statement today.
Conservatorship Aims - The FHFA will operate the conservatorship, aiming to ``preserve and conserve'' the companies' assets and property and put them ``in a sound and solvent condition,'' according to a fact sheet distributed by the Treasury. There is "no exact time frame'' for when the conservatorship will end, the statement said.
Fannie and Freddie own or guarantee almost half of the $12 trillion in
The Treasury briefed Democratic presidential candidate Barack Obama yesterday and has contacted Republican contender John McCain's staff. Officials also discussed the plans with House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank.
As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie raised $14.4 billion since November and Freddie sold $6 billion of preferred securities. Plans for a $5.5 billion sale were delayed as the company's fortunes sank. Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show. Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period.
Do you think it will stabilize housing and financial markets?
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September 7, 2008 1:20 PM
For a World economy based in credit, the actions of the Federal Government regarding Fannie Mae and Freddy Mac are necessary. The sad fact is that without the extention of huge amounts of credit, the World economy would quickly fail. But while the greedy 'B's benefit, the rest of the tax paying public, their children and grandchildren, end up holding the bag as they pay for the bailout through taxation, fewer social services, higher energy prices and a generally lowering standard of living.
It's time in this country to start addressing the idea that certain people make too much money on the backs of the majority of the population, a scenario that is reminicient of the days of the industrial revolution 100 years ago. And any new administration in this country must take steps to level the income field.
Steps that must be taken include an implementation of a concept of a living income. The Obama campaign has suggested that around $250,000.00 for a family should cap the living income standard. Such an income level is more than sufficient for quality living no matter where one lives in the United States. Income, from whatever source, beyond that level must be taxed heavily with no loopholes or exceptions.
By heavily taxing the Greedy 'Bs', resources become available for improving the quality and standard of living for all citizens.
Banks and other lenders must be further constrained in terms of the interest rates thay can charge. Credit card companies must be limited to 10% interest on unpaid balances. Banks must be required to limit loan amounts to, at most, 90% of asset value.
Adequate health care is critical for a quality standard of living. Doctors, hospitals and clinics make too much money. Health care insurance company profits eat into available resources. To help remedy this, medical care providers, whether doctors, hospitals or insurance providers must be taxed to pay for a yearly indemnified health benefit of $50,000.00 for every American citizen. Percentage increases in health care costs in this country would translate into equal percentage tax increases to these providers. Reductions in health care costs would result in a lowering of this tax rate. There is no better incentive available to contain skyrocketing health care expenditures in this country, costs that are destroying the fabric of the society.
September 7, 2008 1:31 PM
This is going to have a major affect on a lot of things, including new tax reform for the new presidential administration. Great article Andy. I think it will top my passing the week post on the 14th.
September 7, 2008 1:56 PM
Long live king paulson. The financial ruler and saviour of america. Spending tax payer money like it his own. Who voted that he could do this? That's right - no one expect that loony bush.
September 7, 2008 2:55 PM
I wonder what Monday will bring?
According to this article, Fannie and Freddie stock remains untouched by conservatorship, and will trade as they always have. This comes directly from Treasury, so I'm quite confident the stocks will trade as normal:
http://www.ehow.com/how_4503604_mac-fre-stock-during-conservatorship.html
How to Trade Fannie Mae (FNM) and Freddie Mac (FRE) Stock During Conservatorship
Whether they trade higher or lower remains to be seen!
September 7, 2008 5:29 PM
The federal government just nationalized an industry, introducing massive new political risk into the US stock market. I can't see how anything good could possibly come of this.
Except for China. China should be very happy that it now holds what are in effect high-yield U.S. Treasury notes that it can now dump for well above what it paid for them, solving its own recent cash crunch. China owes the US Treasury a great, big Thank You.
September 7, 2008 6:27 PM
As an employee and stock holder in one of these companies it is a very tough time for. I believe that atleast one or both of these companies could have made it through as they had sufficient capital (espically if the government injected the addition amount that had set aside). Now with a full takeover, or essentially placing the companies in bankruptcy, the two GSE essentially closed today. As government agencies they will grown more ineffficent and beuracratic, and things will get worse.
Paulson and Lockhart just wanted to flex their political muscle. Paulson can come across as the saviour of all home owners (if things fail he will just blame congress) and preprare for his run at the presidency in 2012. Lockhart goes from being a crony regulator to CEO of 2 fortune 500 companies...talk about a power trip.
With unlimited funds any company can recover...though we are creating a bigger tsunami for ourselves in the future. I agree regulatory change was needed, but such drastic action is too much. These companies employ 10000+ people in the DC region with many of them stock holders (250 million of stock is held by employees). What motivation do they have to make things better when all their all their past hard work was for naught. It is a sad day indeed today, yet the market will celebrate this on Monday!
September 8, 2008 10:35 AM
In my opinion, government guarantees of these companies' debt must stop. Is anybody surprised the government has stepped in to save these two firms? Of course not, the government has promised to do so since their inception and therein lies the problem. There has to be consequences for failure in order for capitalism to work.
I highly disagree with the anonymous commenter above that a "living income" proposal will do anything but make matters worse. Far worse, in fact.
September 9, 2008 9:17 AM
Thanks to everyone for their insightful comments. Definetly generated some healthy discussion and I think the GSE takeover still has a long way to play out. This is only the first chapter of the much needed GSE reform. How congress shapes the future of the companies and when we get out the housing depression will be key factors going forward.
September 9, 2008 8:47 PM
I am commenting on the first post made by anonymous. You started out great but then you starting talking about "B's". Typical anti-capitalistic lingo. Ugh. I agree with Kyleaaa that you seem to have the solutions but what is the full picture? You are essentially suggesting that we should adopt socialist reforms are you not? What about the taxes that will be used to pay for the social reformation you are suggesting that our nation needs? You point out that this bailout by our government is just another 'scheme of the rich' instead of calling it what it is, a socialist move. The bailout is just an example of the blur between the lines of capitalism and socialism in our country. This blur between governmental forms, is what it is. However, the issue that perplexes me the most from this blog posting is the danger of the crash of the world financial markets. Without this bailout, what would have happened in the world financial markets and why???
September 10, 2008 2:53 PM
Great...senior employees at these companies are going to get compensated for all their stock losses. What about other shareholders. From the WSJ:
"The federal regulator now running Fannie Mae and Freddie Mac is rushing to put in place a retention program to encourage key employees to stay put, despite the huge losses some have suffered on their shares in the companies.
Some employees saw large parts of their savings disappear over the past year as the stock prices crashed. In 4 p.m. composite trading Tuesday on the New York Stock Exchange, Fannie's shares were quoted at 99 cents, down from about $63 a year ago. Freddie closed at 88 cents, compared with about $59 a year ago.
"The employees of the two firms are extremely important to their ongoing ability to fulfill their mission," said James Lockhart, director of the Federal Housing Finance Agency, or FHFA, which seized control of management of the companies over the weekend. "Even before the actions this weekend, we had hired a consultant to develop a retention program. We are working quickly to finalize it." A spokeswoman for the agency said the new plan would include retention bonuses.
Known as "pay-to-stay" bonuses, these awards typically are given to about a fourth of a company's work force. Some staffers have a chance to make twice as much if they "stick around, the company does well and you do particularly well in your role," said Timothy J. Sparks, president of Compensia Inc., a pay consultancy in San Jose, Calif. The idea is "to keep them in the saddle for 18 months."
Fannie and Freddie probably will have to rely mostly on cash in their retention bonuses because it is unclear how long they will remain under the regulator's control and whether the stock prices will ever recover. Most of the employees "are going to be more interested in cash" than stock grants, said Jim Stoeckmann, compensation-practice leader for WorldatWork, a human-resources professional association."